Annual Report 1999 (For year ended March 31,1999)

Notes to Financial Statements

Kawasaki Kisen Kaisha, Ltd. and Consolidated Subsidiaries
Notes to Consolidated Financial Statements
March 31, 1999

 

1. Summary of Significant Accounting Policies
(a) Basis of presentation
Kawasaki Kisen Kaisha, Ltd. (the "Company") and its domestic subsidiaries maintain their accounting records and prepare their financial statements in accordance with accounting principles and practices generally accepted in Japan, and its foreign subsidiaries maintain their books of account in conformity with those of the countries of their domicile.
     The accompanying consolidated financial statements have been prepared from the financial statements filed with the Ministry of Finance as required by the Securities and Exchange Law of Japan. Accordingly, the accompanying consolidated financial statements are not intended to present the consolidated financial position and results of operation in accordance with accounting principles and practices generally accepted in countries and jurisdiction other than Japan. For the purposes of this document, certain reclassifications have been made to present the accompanying consolidated financial statements in a format which is familiar to readers outside Japan. However, no adjustments have been made which would change the financial position or the results of operations presented in the original financial statements.
     The translation of yen amounts into U.S. dollar amounts is included solely for convenience and has been made, as a matter of arithmetic computation only, at the rate of ¥120.55= U.S.$1, the approximate rate of exchange on March 31, 1999 on the Tokyo Foreign Exchange Market. Furthermore, the translation should not be construed as a representation that yen have been, could have been, or could in the future be, converted into U.S. dollars at that or any other rate.
    
(b) Principles of consolidation and accounting for investments in unconsolidated subsidiaries and affiliates
The consolidated financial statements include the accounts of the Company and its significant subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
     The equity method is applied to investments in significant affiliates (companies owned 20% to 50%) in accordance with the provisions of the Regulations for Consolidated Financial Statements.
     The difference, not significant in amount, between the cost and the underlying net equity in the consolidated subsidiaries at the dates of acquisition is, as a rule, amortized over a period of five years.
    
(c) Accounting Period
The accounting period of the Company begins on April 1 and ends on March 31 of the following year. The accounts of 61 subsidiaries are closed on December 31 each year. The account of one subsidiary is closed on January 31 each year and the account of another subsidiary is closed on the last day of February each year. The necessary adjustments for the above companies are made on consolidation. Cygnus Insurance Company Limited changed its closing date from March 31 to December 31, and the 9-month results have been included in the consolidated accounts.
    
(d) Translation of foreign currencies
All monetary assets and liabilities denominated in foreign currencies, other than those hedged by forward exchange contracts, are translated into yen at the rates of exchange in effect on the dates of acquisition. Gains and losses resulting from settlement of these items are credited or charged currently to operations. Accounts hedged by forward exchange contracts are translated into yen at the contracted rates, with the resulting translation differences allocated to income based on the number of months in the respective contract periods.
      
(e) Translation of accounts of foreign consolidated subsidiaries
Accounts of the foreign consolidated subsidiaries, except for the components of shareholders' equity, are translated into yen at the rates of exchange in effect at the balance sheet date. The components of shareholders' equity are translated at historical exchange rates.
     Translation differences arising from the application of the rules are presented as translation adjustments in the accompanying consolidated financial statements.
    
(f) Revenues and related costs
Revenues from cargo freight and the related costs and expenses, except for those from container vessels, are recorded in full at the date the vessels complete their voyages. Revenues from container vessels are recorded in full at the date a vessel embarks from the port where the cargo is loaded, and no year-end adjustments are made for any portions of uncompleted voyages. The related costs and expenses are charged to income as incurred. Revenues and costs with respect to charter services are accounted for on an accrual basis.
    
(g) Investments
Investments in marketable and other securities are generally carried at cost determined by the moving average method.
     The Commercial Code of Japan requires investments to be written down where there has been a permanent decline in their value. Where considered necessary, the Company has written down the value of such investments.
    
(h) Fuel and supplies
Fuel and supplies are stated at cost determined by the moving average method.
    
(i) Vessels, property and equipment and depreciation
Vessels, property and equipment are stated at cost except that the cost of certain property and equipment has been reduced by the capital gains resulting from the disposal of certain vessels, property and equipment as permitted by Japanese tax regulations.
     The depreciation of property and equipment is computed principally by the declining-balance method over the estimated useful lives of the respective assets which differ according to general category, type of construction and use.
     The depreciation of vessels is computed by the straight-line or the declining-balance method over the estimated useful lives of the respective vessels.
     Maintenance, repairs and minor improvements are charged to income as incurred. Major improvements are capitalized.
    
(j) Capitalization of interest expenses
Interest expenses are generally charged to income as incurred. However, interest expenses incurred in the construction of certain assets, vessels in particular, are capitalized and included in the costs of assets when the construction period is substantially long and the amount of interest incurred in such period is significantly large.
    
(k) Accrued expenses for overhaul of vessels
The Company's vessels are subject to periodic overhaul. An accrual is provided for the current portion of the estimated total expense for overhauling the vessels.
    
(l) Leases
Noncancelable lease transactions are accounted for as operating leases (whether such leases are classified as operating or finance leases) except that lease agreements which stipulate the transfer of ownership of the leased property to the lessee are accounted for as finance leases.
    
(m) Income taxes
The Company and domestic consolidated subsidiaries are subject to a number of taxes based on income, which, in the aggregate, resulted in statutory tax rates of approximately 48% for 1999 and 51% for 1998.
     Income tax expenses as shown in the accompanying consolidated statements of income differ from the amounts computed by applying the statutory tax rates referred to above. The principal reasons for such differences are (a) the Company's accounting policy of not providing for deferred income taxes pertaining to timing differences between financial and tax reporting, and (b) certain expenses which are not tax-deductible.
     Income taxes are principally accounted for on an accrual basis. Deferred income taxes pertaining to timing differences between tax and financial reporting are recognized principally by the U.S. consolidated subsidiaries.
    
(n) Employees' retirement benefits
Employees who terminate their employment are entitled, under most circumstances, to lumpsum severance payments, determined by reference to their current basic rate of pay, length of service and the conditions under which the termination occurs. Accrued employees' retirement benefits are stated at 40% of the amount which would be required to be paid if all employees covered by the plan voluntarily terminated their employment as of the balance sheet date.
     The Company also has a funded non-contributory pension plan covering certain employees who meet specific eligibility requirements as to age and length of service. This plan previously replaced 65% of the retirement benefits referred to above. The Company, effective the year ended March 31, 1999, changed this to 100% replacement, with the exception of certain additional benefits to be paid in accordance with the terms of the optional retirement plan for maritime employees. Accrued employees' retirement benefits provided under the former retirement plan, which entitled employees to receive lump-sum payments upon retirement, are being amortized over the same period as the amortization of past service cost. The unamortized amount of accrued employees' retirement benefits at March 31, 1999 amounted to ¥920 million (US$7,634 thousand). The current cost of the pension plan and the amortization of past service cost are charged to operations.
    
(o) Reclassification
In accordance with the change of the regulations relating to the Securities and Exchange Law of Japan, certain reclassifications have been made to conform to the fiscal 1999 presentation.

  

2. Change in Method of Accounting
In accordance with Japanese Maritime Accounting Policies, the Company is permitted to apply for one of the following accounting methods in the recognition of trade accounts receivable relating to vessels which are accounted for by the voyage completion method:
-when the right to demand the freight becomes effective, or
-based on the standard summing up of a voyage's freight.
     The Company formerly employed the first method and recorded the uncollected receivables relating to the vessels which have not yet completed their voyages at the year end as trade accounts receivable on its balance sheet.
     Following the introduction of a new accounting system, the Company intends that its accounting procedures be further streamlined and has thus changed its accounting for trade accounts receivable and no longer reflects such accounts on its balance sheet.
     This change decreased trade accounts receivable and the corresponding advances reflected on the balance sheet by ¥4,398 million from the amount which would have been recorded under the method applied in previous years. This change, however, had no effect on net income for the year ended March 31, 1999.

    

3. Accounts and Notes Receivable - Trade
Accounts and notes receivable - trade at March 31, 1999 and 1998 consisted of the following:
       
  Millions of yen Thousands of
U.S. dollars
1999 1998 1999
Unconsolidated subsidiaries and affiliates ¥ 756 ¥ 823 $ 6,268
Other 46,146 57,304 382,796
  ¥46,902 ¥58,127 $389,064

    

4. Legal Reserve
In accordance with the provisions of the Commercial Code of Japan, the Company and it's consolidated subsidiaries have provided a legal reserve by appropriating retained earnings. This reserve is not available for dividends but may be used to reduce a deficit by resolution of the shareholders or may be capitalized by resolution of the Board of Directors.
     Effective the year ended March 31, 1999, this reserve which was formerly presented as a separate item has been included in retained earnings of ¥2,313 million (US$19,184 thousand). In order to conform the prior year's presentation to that of the current year, the balance of the legal reserve of ¥2,085 million at March 31, 1998 has been reclassified and included in retained earnings.

    

5. Appropriation of Retained Earnings
Under the Commercial Code, the appropriation of retained earnings with respect to a given financial period is made by resolution of the shareholders at a general meeting held subsequent to the close of such financial period. The accounts for that period do not, therefore, reflect such appropriation.

    

6. Leases
The following pro forma amounts represent the acquisition costs, accumulated depreciation and net book value of leased property as of March 31, 1999 and the related depreciation and interest expense for the year ended March 31, 1999, which would have been reflected in the consolidated balance sheet and the related consolidated statement of income if finance lease accounting had been applied to the finance lease transactions currently accounted for as operating leases:
  
  Millions of yen
Equipment Other Total
Acquisition costs ¥9,104 ¥2,289 ¥11,393
Accumulated depreciation 6,818 1,252   8,070
Net book value ¥2,286   ¥1,037 ¥3,323
    
  Thousands of U.S. dollars
Acquisition costs $75,517 $18,989   $94,506
Accumulated depreciation 56,554 10,385 66,939
Net book value $18,963 $8,604 $27,567
    
  Millions of yen Thousands of U.S. dollars
Depreciation ¥1,719 $14,261
Interest expense ¥291 $2,417

Lease expenses relating to finance leases accounted for as operating leases amounted to ¥1,928 million (US$15,989 thousand) and ¥4,481 million, as finance lease revenues amounted to ¥27 million (US$224 thousand) and ¥51 million for the years ended March 31, 1999 and 1998, respectively.
     Future minimum lease payments and revenues subsequent to March 31, 1999 for finance leases accounted for as operating leases are summarized as follows:
     
  Payments
Year ending March 31, yen U.S. dollars    Millions of yen Thousands of
U.S. dollars
2000 ¥9 $73
2001 and thereafter 19 162
  ¥28 $235
    
  Revenues
Year ending March 31, yen U.S. dollars    Millions of yen Thousands of
U.S. dollars
2000 ¥16 $135
2001 and thereafter 15 123
  ¥31 $258

    

7. Amounts per Share
Amounts per share of net income and net assets, as presented below, are based on the average number of shares of common stock of the Company outstanding during each year and the number of shares outstanding at each balance sheet date, respectively:
  
  Yen U.S. dollars
1999 1998 1999
Net income ¥2.73 ¥2.85 $0.023
Net assets 117.23   116.88 0.972

Diluted net income per share is not presented because the Company has issued no common stock equivalents such as bonds with warrants or convertible bonds.

    

8. Commitments and Contingent Liabilities
As of March 31, 1999, commitments made by the Company amounted to US$50,419 thousand (¥6,078 million) for the construction of vessels.
     Contingent liabilities for notes receivable discounted and endorsed, loans guaranteed, joint indebtedness as of March 31, 1999 were as follows:
    
  Millions of yen Thousands of
U.S. dollars
Notes receivable discounted and endorsed ¥ 497   $4,120
Loans guaranteed 9,640 79,964
Joint indebtedness 178,059 1,477,061
     Total ¥188,196   $1,561,145

    

9. Derivatives and Hedging Activities of the Company
The Company has entered into forward exchange contracts to reduce its exposure to adverse fluctuations in foreign exchange rates related to its receivables and payables denominated in foreign currencies. The Company has also entered into interest rate and currency swap agreements and currency option agreements to minimize the impact of foreign exchange and interest rate movements related to its outstanding debt.
     The purpose of the Company's hedging with forward exchange contracts is to protect the Company from the related market risk. In addition, the purpose of the interest rate and currency swap agreements and currency option agreements is to modify effectively the characteristics of the interest on its outstanding debt and its principal amounts.
     The Company is exposed to certain market risks arising from its forward exchange contracts, swap agreements and option agreements. The Company is also exposed to the risk of credit loss in the event of non-performance by the counterparties to the currency and interest derivatives; however, the Company does not anticipate non-performance by any of these counterparties all of whom are financial institutions with high bond ratings.
     At March 31, 1999 and 1998, the outstanding forward exchange contracts were as follows:
    
  Millions of yen Thousands of
U.S. dollars
1999 1998 1999
Currency related
Forward exchange contracts:
   Sell (U.S. dollars):
      Contracts outstanding ¥4,081 ¥ - $38,000*
      Unrealized gain (loss) 13 - 111
    
   Buy (U.S. dollars):
      Contracts outstanding ¥4,081 ¥ -   $38,000*
      Unrealized gain (loss) (13) - (111)
    
Option contracts:
  Written;
   Call U.S. dollars against Yen:
      Contracts outstanding ¥5,732 ¥ - $45,000*
      Book value 18 - 146
      Unrealized gain (loss) (20) -   (165)
  Purchased;
   Put U.S. dollars against Yen:
      Contracts outstanding ¥4,725 ¥ - $45,000*
      Book value 17 - 146
      Unrealized gain (loss) (11) - (94)
    
Swap contracts:
  Receive Deutsche mark/ pay Japanese yen:
      Contracts outstanding ¥ - ¥8,075 $  -
      Unrealized gain (loss) - 3 -
*represents the contracted amounts in U.S. dollars.

The notional amount includes currency swap contracts entered into to hedge payables denominated in a foreign currency, which have been translated and reflected at the corresponding contract rates in the balance sheet at March 31, 1998.
      At March 31, 1999 and 1998, outstanding interest rate swap agreements were as follows:
   
  Millions of yen Thousands of
U.S. dollars
1999 1998 1999
Interest related 
Interest rate swap agreements:
 Fixed-rate into floating-rate
   obligations:
     Notional amount ¥ 9,529 ¥10,686 $ 79,049
     Unrealized gain (loss) 738 665 6,119
 Floating-rate into fixed-rate
   obligations:
     Notional amount ¥35,855 ¥39,962 $297,427
     Unrealized gain (loss) (1,946)   (1,432) (16,142)

The notional amounts represent the total maximum amount of principal in the period remaining for each agreement.

    

10. Marketable and Investment Securities of the Company
Information with respect to the book and related aggregate market values at March 31, 1999 and 1998 of current and non-current marketable securities included in marketable securities, investments in and advances to subsidiaries and affiliates, and investments in other securities are summarized as follows:
    
   Millions of yen
1999  Book value Market value
Marketable securities ¥39,764 ¥41,245
Investments in securities, including
investments in subsidiaries and affiliates		 4,272 6,422
  
   Millions of yen
1998 Book value Market value
Marketable securities ¥42,476 ¥43,396
Investments in securities, including
investments in subsidiaries and affiliates		 4,273 8,765
    
   Thousands of  U.S. dollars
1999  Book value Market value
Marketable securities $329,860   $342,141
Investments in securities, including
investments in subsidiaries and affiliates		 35,444 53,275

    

11. Short-Term Loans and Long-Term Debt of the Company
(a) Short-term loans from banks and insurance companies at interest rates ranging from 0.582% to 6.0% per annum amounted to ¥40,771 million (US$338,204 thousand) at March 31, 1999.
    
(b) Long-term debt at March 31, 1999 consisted of the following:
    
  Millions of yen Thousands of
U.S. dollars
Loans from The Japan Development
   Bank payable in installments at interest rates ranging from
   3.15% to 8.5% per annum for fixed-rate loans and
   at variable rates for floating-rate loans,due 1999~2014		 ¥32,465 $269,309
    
Loans from other banks and insurance
   companies payable in installments at interest rates ranging from
   1.62% to 6.9% per annum for fixed-rate loans
   and at variable rates for floating-rate loans, due 1999~2010		 24,982 207,230
    
Long-term accounts payable 28 231
   2.45% notes in Japanese yen, due October 24, 2000 10,000 82,953
   3.10% notes in Japanese yen, due May 30, 2002 5,000 41,477
   2.50% notes in Japanese yen, due July 4, 2000 5,000 41,477
   2.15% notes in Japanese yen, due December 10, 2001 7,000 58,067
   2.45% notes in Japanese yen, due December 12, 2002 2,500 20,738
   3.37% notes in Japanese yen, due February 24, 2004 2,500 20,738
         Total 89,475 742,220
    
Less:
Current portion of long-term debt (7,277) (60,365)
Current portion of long-term accounts payable - -
  ¥82,198 $681,855
  
(c) The aggregate annual maturities of long-term debt subsequent to March 31, 1999 are summarized as follows:
   
Year ending March 31, yen U.S. dollars Millions of yen Thousands of
U.S. dollars
2000 ¥7,277 $ 60,365
2001 21,992 182,430
2002 15,152 125,694
2003 13,851   114,895
2004 and thereafter 31,203 258,836
  ¥89,475 $742,220
    
(d) A summary of assets pledged as collateral for long-term debt at March 31, 1999 is presented below:
  
  Millions of yen Thousands of
U.S. dollars
Marketable securities ¥6,363 $ 52,788
Vessels and property, at net book value 62,964 522,302

As is customary in Japan, short-term notes are generally issued to banks under uniform standard agreements which provide that additional collateral (including cash on deposit with such banks) will be furnished at the banks' request, and that any collateral so furnished will be applicable to all indebtedness to such banks. Certain of the collateralized loan agreements contain provisions which permit the lenders to require additional collateral.

    

12. Segment Information
(a) Business segment information
For the years ended March 31, 1999 and 1998, the consolidated results have been divided into three segments.
Year ended March 31, 1999 Millions of yen
  Marine
transportation		 Services incidental
to transportation		 Other Total Eliminations Consolidated
1.Revenues:
   (1)Operating revenues ¥415,820 ¥83,615 ¥13,665 ¥513,100 ¥ - ¥513,100
   (2) Intra-group sales and transfers 1,345 37,587 6,727 45,659 (45,659) -
         Total revenues 417,165 121,202 20,392 558,759 (45,659) 513,100
    
2. Operating expenses 398,520 119,982 19,286 537,788 (46,196 ) 491,592
   Operating income* ¥18,645 ¥1,220 ¥1,106 ¥20,971 ¥ 537 ¥21,508
 
3. Assets, depreciation and capital expenditures:
   (1)Total assets ¥432,929 ¥71,729 ¥52,875 ¥557,533 ¥ (35,034) ¥522,499
   (2)Depreciation ¥26,380 ¥3,571 ¥ 908 ¥30,859 ¥ - ¥30,859
   (3) Capital expenditures ¥29,372 ¥2,219 ¥ 328 ¥31,919 ¥ - ¥31,919

    

Year ended March 31, 1998 Millions of yen
  Marine
transportation		 Services incidental
to transportation		 Other Total Eliminations Consolidated
1.Revenues:
   (1)Operating revenues ¥415,107 ¥86,738 ¥15,910 ¥517,755 ¥ - ¥517,755
   (2)Intra-group sales and transfers 1,959 47,481 5,782 55,222 (55,222) -
         Total revenues 417,066 134,219 21,692 572,977 (55,222) 517,755
 
2.Operating expenses 392,360 133,568 20,922 546,850 (56,017) 490,833
   Operating income* ¥ 24,706 ¥ 651 ¥ 770 ¥26,127 ¥ 795 ¥26,922
 
3.Assets, depreciation and capital expenditures:
   (1) Total assets ¥473,330 ¥79,042 ¥60,528 ¥612,900 ¥ (36,791) ¥576,109
   (2)Depreciation ¥31,919 ¥3,558 ¥ 783 ¥36,260 ¥ - ¥36,260
   (3)Capital expenditures ¥37,266 ¥4,370 ¥ 756 ¥42,392 ¥ - ¥42,392

     

Year ended March 31, 1999 Thousands of U.S. dollars
  Marine
transportation		 Services incidental
to transportation		 Other Total Eliminations Consolidated
1. Revenues:
   (1) Operating revenues $3,449,359 $ 693,612 $113,356 $4,256,327 $ - $4,256,327
   (2)Intra-group sales and transfers 11,159 311,799 55,801 378,759 (378,759) -
         Total revenues 3,460,518 1,005,411 169,157 4,635,086 (378,759) 4,256,327
 
2.Operating expenses 3,305,850 995,286 159,988 4,461,124 (383,210) 4,077,914
   Operating income* $ 154,668 $ 10,125 $9,169 $ 173,962 $4,451 $ 178,413
 
3. Assets, depreciation and capital expenditures:
   (1)Total assets $3,591,286 $ 595,011 $438,614 $4,624,911 $(290,618) $4,334,293
   (2)Depreciation $ 218,834 $ 29,622 $7,534 $ 255,990 $ - $ 255,990
   (3)Capital expenditures $ 243,651 $ 18,408 $2,717 $ 264,776 $ - $ 264,776
    
(b) Geographical segment information
Effective the year ended March 31, 1999, each segment principally covers following countries or regions:
   North America: U.S.A. and Canada
Europe: U.K., Germany, the Netherlands and France
Asia: Hong Kong, Singapore and Thailand
Other: Australia
Year ended March 31, 1999 Millions of yen
         Japan North
America		 Europe Asia Other Total Eliminations Consolidated
1.Revenues:
   (1) Operating revenues ¥492,404 ¥12,678 ¥4,146 ¥3,816 ¥ 56 ¥513,100 ¥ - ¥513,100
   (2)Intra-group sales and transfers 378 17,044 2,911 5,270 436 26,039 (26,039) -
         Total revenues 492,782 29,722 7,057 9,086 492 539,139 (26,039) 513,100
    
2.Operating expenses 472,459 28,948 7,275 9,035 471 518,188   (26,596)   491,592
   Operating income* 20,323 774 (218) 51 21 20,951 557 21,508
        
3.Assets: ¥479,091 ¥27,537 ¥29,352 ¥7,016 ¥ 1,646 ¥544,642 ¥(22,143) ¥522,499

        

Year ended March 31, 1999 Thousands of U.S. dollars
         Japan North
America		 Europe Asia Other Total Eliminations Consolidated
1.Revenues:
   (1)Operating revenues $4,084,647 $105,169 $34,394 $31,651 $ 466 $4,256,327 $ - $4,256,327
   (2)Intra-group sales and transfers 3,132 141,385 24,143 43,720 3,621 216,001 (216,001) -
         Total revenues 4,087,779 246,554 58,537    75,371 4,087 4,472,328 (216,001) 4,256,327
    
2.Operating expenses 3,919,194 240,140 60,349 74,947 3,908 4,298,538 (220,624) 4,077,914
   Operating income* 168,585 6,414 (1,812) 424 179 173,790 4,623 178,413
        
3.Assets: $3,974,208 $228,429 $243,486 $58,197 $13,652 $4,517,972 $(183,679) $4,334,293
*Operating income is stated before adding or deducting interest and other non-operating income and expenses. Accordingly, the amounts presented in the above table do not necessarily agree with the amounts of income before income taxes and equity in earnings presented in the consolidated statements of income and retained earnings.

    

13. Subsequent Events
On June 29, 1999, the shareholders of the Company approved the following appropriations of retained earnings:
    
  Millions of yen Thousands of
U.S. dollars
Retained earnings at March 31, 1999 ¥3,023 $25,079
Transfer from general reserve 1,512 12,539
Cash dividends (1,756) (14,571)
Transfer to legal reserve (181) (1,498)
Directors' bonuses (50) (415)
Transfer to special reserve (2,438) (20,220)
Retained earnings to be carried forward 110 914

In Japan, cash dividends proposed by the Board of Directors from retained earnings accumulated as of the end of the year are approved at the general shareholders' meeting held in the following year. In the accompanying consolidated financial statements, cash dividends are presented as a deduction from consolidated retained earnings in the year approved and paid. Accordingly, such appropriations are not reflected in the current year's financial statements.
     On June 24, 1999, the Company issued 1.3% unsecured bonds due June 13, 2002 in the amount of ¥3,000 million (US$24,886 thousand).